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Tuesday, June 30, 2015

Unusual trouble brewing ahead?

Enough signs to warn us that the economy has to break out of its slow growth trajectory

By Han Fook Kwang Editor At Large

These days the news on the economic front is usually so bad it often doesn't seem like anything new is happening.

Same old, same old: the Greek crisis, China's slowdown and its impact on the Asean countries, Japan's stagnating economy, and other equally depressing developments.

In Singapore, the message for some time has been that the country is entering a period of slow growth, it's the new normal and everyone ought to get used to it.

I hope this won't lull people into thinking that bad news is so normal nothing needs to be done about it.

Not especially when it comes one after another, as it did the past two weeks: Four in a row, even in these difficult times, seems like unusual trouble brewing ahead.

First came the news that the total number of workers in Singapore had fallen in the first quarter of this year for the first time in six years.

Not since the global financial crisis of 2008 had the job market performed so poorly, with every sector of the economy shedding jobs.

Economists interviewed said it was too early to be alarmed, that it was expected given the slowdown in the economy; others speculated it could be because firms were moving towards less labour-intensive methods.

Then, last Tuesday, it was announced that inflation in May had remained in negative territory for the seventh straight month.
A separate measurement of prices, known as core inflation (which excludes private transport and housing costs), was at its lowest level in five years, at 0.1 per cent.

You might think that declining prices are good for consumers (Isn't the Great Singapore Sale still on?) but the dreaded word in economics is deflation, which no country wants to be caught in.

When prices keep falling, many businesses will be in trouble as their takings go down, leading them to shed jobs and avoid investing for the future.

When that happens, the consumer who is also a worker ends up poorer.

No one is saying Singapore is in deflation but there is worry that the latest numbers indicate weakening demand for goods and services, which is bad for business.

On the same day, the Singapore Business Federation (SBF) released the findings of a survey of small and medium-sized enterprises.

It reported that business confidence among SMEs was at its lowest level since early 2013.

Why are corporate chiefs so downbeat?

Reasons cited included the uncertain global economy and the hiring squeeze faced by many employers as a result of the Government's more stringent foreign labour policy.

To round up this quartet of reports on miseries, the Monetary Authority of Singapore released its quarterly survey of economists: These expert forecasters expect the economy to grow by 2 to 2.9 per cent this year, which is in the lower half of the Government's 2 to 4 per cent estimate.

The lower-than-expected forecast was lower than what they reported in March, showing that their expectations had turned gloomier in recent months.

This will be the first time in Singapore's independent history that it would be experiencing low growth for four consecutive years.

In the past, whenever the economy slipped into recession, as it did in 1998, 2001 and 2009, it would bounce back the next year, or the following at the latest.

In those three recession years, growth in the year after was all above 4 per cent.

Indeed in 2010, it bounced sky high to 15.2 per cent, after the previous year's downturn.

Singapore isn't in a recession yet but I wonder if it's better to experience an occasional dip which acts to spur everyone to spring back to high growth, rather than this slow slide downhill with no turnaround in sight.

Because this is a new experience here, it isn't clear what an extended period of slow growth will mean to jobs, wages and the effort to restructure the economy to a higher performing one.

Will it suffer, for example, the same fate as Japan which has been struggling with this problem the last 20 years?

There was one other piece of news recently that brought some cheer, though, for me, there was also an ominous side to it.

The Singapore Exchange (SGX) announced the appointment of a new chief, raising hopes that he would be able to make changes which would breathe more life into the stock market here.
Investors and brokers have been concerned for some time over the thin trading volumes and the low number of new listings on the exchange.

In a piece published last Tuesday, my colleague Grace Leong highlighted the fact that the average value of shares traded daily here is even lower than in Thailand, not to mention high-flying Shanghai, Tokyo and Hong Kong,

I hope the new chief, Mr Loh Boon Chye, succeeds, but I fear the problem is a more fundamental one requiring more than merely tinkering with a few rule changes.

The stark reality is that the Singapore market has been eclipsed by bigger and more dynamic exchanges elsewhere, especially in Shanghai and Hong Kong.

The Chinese market is many times bigger and Hong Kong has benefited greatly from its spectacular growth.
The Hong Kong market's monthly turnover is now 22 times larger than Singapore's.

In this fast-moving trading world, companies can list anywhere, and are attracted to places where capital is available, the economy is dynamic and there are better growth prospects.

Investors and stock punters too can put their money anywhere at the swipe of a smartphone touchscreen.

Who knows how many Singaporeans are trading in the middle of the night on the New York Exchange and forgoing the action at SGX?

But here's the bigger worry: Could what has been happening at the SGX be a harbinger of what might happen to the larger Singapore economy if it doesn't break out of its slow growth trajectory?

As with the SGX, will this be seen as an unexciting place, missing much of the action that has taken place elsewhere, with even its own people preferring to trade elsewhere?

The slide that has taken place at the SGX took only a few years, and the gap between it and Hong Kong is now so large you have to wonder if it can ever be closed.

Can it happen on a larger scale with the economy?

It's a sobering thought and you can't say the warning signs were not everywhere.

[See also, "Unconventional Wisdom: "THE GLOBAL ECONOMY WON'T RECOVER, NOW OR EVER", and the article below]

Mr Peng, along with the bank's Global Chief Investment Strategist Steven Wieting, was speaking at a conference on key investment themes for the second half of 2015. The conference was held in conjunction with the Bank's Global Investment Outlook Roadshow.

"Policies for the local labour market has squeezed growth and profits in the past few years.

"This has gotten to a point where we're seeing both declines in employment and declines in industrial activity at levels last seen in 2009," Mr Peng said.

These factors have resulted in pretty sharp declines in the earnings per share of Singapore companies, he added.

Singapore's industrial production fell 2.3 per cent in May as it battled headwinds to growth from sluggish global demand, statistics showed, while the ratio of job vacancies to unemployed persons rose to a 17-year high of 143 openings per 100 job seekers in the first quarter.

Mr Peng also noted that Singapore's export competitiveness has been affected by the weakening of the Yen and the Euro, and its currency strength relative to the other Asian countries apart from China. Japan and Europe are top destinations for Singapore exports.

He speculated that in light of the "weak" economy and the upcoming elections, the government might make changes to Singapore's monetary and fiscal policy before the elections.

"With inflation pretty low and additional pressure from the election, there could be a turn in monetary and fiscal policy as we move closer to the election."

He noted, however, that with the January 2017 election deadline not far away, there would be little time before then for economic policy changes to take effect.

Citi Private Bank's Mr Wieting added that it was important to assess Singapore's current economic conditions against its present level of economic development.

"Let's put this in perspective, this is a developed economy, these things are not the same thing as a catching up story (in a developing country)."